Consumer-based stocks often pay dividends, but one that may not get enough attention is Altria Group (MO 1.45%). Its dividend offers a cash return well above market averages even as it lacks the growth that consumer companies with ties to the tech industry often achieve.
Nonetheless, it deserves a closer look, and the decision to buy likely hinges on some compelling attributes amid one aspect of the company that will probably repel many investors.
Reason to buy: Dividend sustainability
Altria investors earn a yearly dividend of $3.76 per share. That yields 8.1% at current prices. That return is massive considering the 1.6% average cash return of the S&P 500, and such a disparity may leave investors wondering whether it is time to lock in the dividend yield or run away from a return that may be too good to be true.
Despite its size, the payout could pay off for investors. In the first three quarters of 2022, $5.5 billion in free cash flow covered the $4.9 billion in dividend costs for that period, indicating the sustainability of the payout.
Also, the company has raised it every year since 2009. And even when it passed dividend cuts in both 2007 and 2008, investors received shares of Kraft (now part of Kraft Heinz) and Philip Morris International in lieu of a higher payout as those companies spun off. Thus, payouts have served investors increasingly well for decades.
Reason to buy: Low valuation
Investors should also note that Altria currently sells at its lowest valuation at any time in the 2020s. Its P/E ratio has fallen below 15, making it slightly cheaper than its former subsidiary, Philip Morris International, at an 18 P/E ratio.
Altria stock has suffered recently amid health-related issues tied to its investment in Juul. The Food and Drug Administration (FDA) banned Juul e-cigarettes in last June due to concerns about the health effects of vaping and its popularity among adolescents. Although the FDA has suspended that ban pending further investigation, it has likely served as a ceiling on Altria's stock growth and multiple expansion.
Reason to buy: Resiliency
However, investors should also remember that Altria has a history of surviving despite the health issues with its product. The Surgeon General first warned about the dangers of tobacco use in a report in 1964. At that time, Altria traded at a split-adjusted $0.13 per share.
Since then, smoking rates have fallen, governments and companies banned tobacco use in most public areas, and Altria has paid tens of billions of dollars in damages to settle lawsuits related to smoking.
But amid the social pressure, stock prices and dividends rose over time. Steady price increases mitigate the lost revenue from less smoking. And since smoking rates climbed during the pandemic, investors have all the more reason to believe in Altria's future.
Reason to sell: Personal objections
Nonetheless, the reason for Altria's resiliency may give some investors pause about owning the tobacco stock. Indeed, studies such as the aforementioned 1964 Surgeon General's report have highlighted the addictive qualities and potentially deadly consequences of long-term tobacco use.
Some investors may take an interest in Altria stock despite the issues caused by tobacco. Others may take the opposite view, wanting nothing to do with the tobacco industry despite its potential to drive returns.
This is a reminder that investing is often an emotional as well as a financial activity. In the end, each investor has to live with one's decisions and accept that they may not want to own such a stock under any circumstances. Nobody should feel wrong about taking such a stand or judge others for doing so. If owning Altria leads to moral objections or emotional distress, one should avoid the stock at all costs.
Should I buy Altria?
Investors should not buy Altria if they have personal or moral reasons not to own tobacco stocks. However, from a purely financial perspective, income investors should win with this stock. It has a long history of paying high dividends, and that payout faces no apparent threats.
Moreover, Altria sells at a low valuation. Even if that earnings multiple does not improve significantly, the stock's history of thriving amid seemingly insurmountable challenges bodes well for investors. If one can own this stock without misgivings, it looks like a lucrative addition to an income-generating portfolio.
